A Learning Experience, Pearson Proffers up a Mixed Bag in Q3

Narrow-moat Pearson’s nine-month trading update showed some positive signs of improvement, with underlying revenue up 10% year over year. Continued decline in the higher education courseware business appears to have spooked investors, however, with the share price down around 8% at the time of writing. Management is blaming a decline in college enrollments, partly as a result of the strengthening of the labor market. While this is certainly plausible, it comes at a time when investors are already skeptical about the shift from textbooks to a digital subscription model with a much lower price point. Ultimately, however, we believe that this is simply the direction the education industry is moving. Pearson will have no choice but to embrace the model and hope that increased penetration and the disintermediation of the secondary market will be enough to offset lower price points. Having already penned in revenue declines of around 7% in this area, we are still relatively comfortable with the direction of travel so far this year. We reiterate our GBX 870 fair value estimate, and see a renewed opportunity in this stock following recent share price declines.